Charter School Funding, Explained

By Luc Schuster, April 6, 2016

Charter-School-Funding,-Explained

Our Commonwealth is built on the idea that our democracy and
our
economy are strongest when all of our children have access to great
public schools. In 1846, Horace Mann, our state’s Secretary
of Education and the nation’s leading advocate of universal
free public education, painted a vivid picture of the role of education
in our history: “Having no other mines to work, Massachusetts
has mined into the human intellect; and, from its limitless resources,
she has won more sustaining and enduring prosperity and happiness than
if she had been founded on a stratification of silver and gold,
reaching deeper down than geology has yet penetrated.” And
through our state constitution, John Adams reminds us that while
education is at the core of our economic strength, this is only part of
why it matters, stressing that our “rights and
liberties” depend on “(w)isdom and knowledge, as
well as virtue, [being] diffused generally among the body of the
people.”

Strategies for providing high-quality public education to all of our
children have been central to public policy debates in Massachusetts
throughout our history. And debate has been especially vibrant in
recent decades. The Education Reform Act of 1993 made wide-ranging
changes to public education in Massachusetts, including authorizing the
creation of charter schools. This brief explains how funding works for
Commonwealth Charter Schools and how it interacts with funding for
traditional school districts. Horace Mann Charter Schools, another less
common type of charter school, receive funding through direct
agreements with host school districts, and therefore are not funded
through the uniform system established by the state and described in
this brief.

How are charter schools funded?

The vast majority of their funding—about 90 percent in FY
2015—comes from tuition payments paid by the sending district
that a student otherwise would have attended. The remaining 10 percent
comes largely from state and federal grants and through private
fundraising. Tuition amounts are set each year by a state formula.
According to the Department of Elementary and Secondary Education
(DESE): “The goal of the Commonwealth charter school tuition
rate formula is to establish a tuition that is comparable to what would
have been spent on a student had he or she stayed in their home
district.1

How are district tuition payments determined?

The simple answer:

Tuition payments are roughly equal to average per pupil
spending in the
sending district (the district where a student resides and would
otherwise have attended the traditional public school). Since charter
schools often educate kids from many sending districts, they receive
different tuition amounts based off of spending levels in each of those
districts. The table below illustrates how this works through a
simplified, made-up example. Per pupil spending in Sending District B
is higher than in the other two districts, so tuition payments received
on behalf of students coming from District B are higher than tuition
payments made on behalf of other students.

The detailed answer:

The actual tuition formula is a three-step calculation that is
more
fine-grained than just using average per pupil spending in the sending
district. Specifically, the formula calculates and then adds together
the following three rates:

a
foundation budget rate that factors
in the specific mix of kids leaving a district for a given charter
school;

an above
foundation rate that captures
average district spending above its foundation budget minimum; and

a facilities
aid rate, a flat per
student amount originally intended to help charter schools pay for
school buildings, usually through a lease. Districts have always been
reimbursed by the state for 100 percent of this amount, so the
effective tuition rate paid by sending districts is really just the sum
of the foundation budget rate and the above foundation rate.

This formula aims to calculate tuitions that more closely
match the
needs of actual students leaving a sending district. But since charter
schools tend to educate fewer in-district special education students
and the formula doesn’t account for this difference, they
often end up receiving a disproportionate share of district special
education funding. See the next section for more detail.

The foundation budget rate
factors in the specific demographic make-up
of students leaving a given district and is modeled on the foundation
budget calculation used in the Chapter 70 education aid formula (see
Demystifying the Chapter 70 Formula for more detail). A traditional
school district’s foundation budget serves as the
state’s definition of an adequate minimum spending level.
Recognizing the need to provide additional supports for certain types
of students, it provides additional funding for low-income students and
English language learners. It also provides additional support for
special education students, but rather than taking an actual headcount,
the formula uses an assumed percentage to estimate special education
enrollment. We discuss this and related issues in the next section.

As part of the charter tuition formula, the state essentially creates a
unique foundation budget for the subset of students leaving a given
district and attending a given charter school. That total amount is
then divided by the number of students leaving for the charter school
to generate the foundation budget rate. This rate varies from the
sending district’s per pupil foundation budget when the
specific mix of low-income or English language learner students leaving
for the charter school is different from the mix in the sending
district at large. Different foundation budget cost assumptions for
different grade levels could also lead to some variation with the per
pupil foundation budget of a sending district.

Since most districts spend more than their required minimum foundation
budget amount, the formula then calculates an above foundation rate
to
capture district spending above this minimum.

This above foundation rate is calculated by:

Identifying a district’s Net
School Spending—roughly total general fund spending from
state and local sources. Net School Spending does not include spending
out of state and federal grants and a few other types of spending.

Adjusting Net School Spending
downwards by two costs that charter schools generally do not incur:
out-of-district special education tuition and retired teacher health
insurance.

Converting adjusted Net School
Spending into an “above foundation percentage” and
multiplying that by the foundation budget rate. For more detail on how
these adjustments are made, see the Preliminary FY16 Net School
Spending Percentage Above Foundation Budget spreadsheet at
the bottom
of this DESE webpage.

Some districts that spend right at their foundation budget
minimum end
up with above foundation rates of $0 (e.g. Everett and Lynn in the
table below), whereas others spend considerably more than their
foundation budget minimum (e.g. Cambridge at $13,291 per pupil). If a
district chooses to increase local spending above its required minimum,
this in turn also increases its charter tuition payments.

Since the foundation budget and Net School Spending calculations do not
account for capital costs, and since charter schools are not eligible
for capital project financing through the Massachusetts School Building
Authority (MSBA), the tuition formula includes a facilities aid rate.
This rate was initially calculated by using per pupil capital spending
from school district end-of-year reports. But the state’s
contribution to local capital projects has been frontloaded since
creation of the MSBA in 2004, rather than spread out evenly as a
portion of regular bond payments, making it harder to model total
capital spending on an annual basis for school districts. Since this
change, the facilities aid rate has been legislatively appropriated
within line item language of the charter reimbursement account. The
facilities aid rate has for many years been unadjusted for inflation,
set at a flat $893 per pupil since FY 2009.

For accounting purposes, the facilities aid rate is part of the total
tuition amount that sending districts pay to charter schools, but
districts are 100 percent reimbursed by the state for this amount.
Facilities aid functions, in effect, as a pass-through of state funding
through districts to charter schools. Therefore, the tuition amount
paid by sending districts is essentially the sum of the foundation
budget rate and the above foundation rate.

In order to show an example of this in practice, below is a table
detailing tuition calculations for the 23 districts sending students to
Prospect Hill Academy’s Somerville Campus. Tuitions range
widely—from $9,522 for students coming from Haverhill to
$25,432 for students coming from Cambridge—driven largely by
variable spending in each of the sending districts.

Districts make these tuition payments on a monthly basis, so
if a
student returns to a district from a charter school mid-year, their
tuition costs are reduced proportionally.

How does the tuition formula treat special education students?

For school funding purposes there are two categories of special
education students: those receiving services in-district and those
receiving services out-of-district. Out-of-district special education
students have greater needs and are typically educated in specialized
private schools. Since sending districts are required by law to meet
the needs of these students, they pay tuition for them to attend these
specialized schools. Therefore, charter schools do not support any
out-of-district special education students. If it is later determined
that a charter student needs to start receiving out-of-district
services, the student goes back to becoming the sending
district’s financial responsibility (for more detail see
Technical Assistance Advisory SPED 2014-5). Out-of-district tuition
payments are supported by local and state revenue (including by the
state’s Special Education Circuit Breaker program) and are
accounted for separately from charter school tuition calculations.
These students are not counted towards the foundation budget rate of
any sending districts, and costs associated with them are also taken
out when calculating the above foundation rate.

By contrast, charter schools do educate in-district special education
students, so costs associated with them are factored into the charter
tuition formula. But because the formula assumes that charters educate
an equal share of special education students as those educated in
district schools, when in fact they tend to educate a lower share, this
provision has led many charter schools to receive a disproportionate
share of a district’s special education funding.
Specifically, 14.3 percent of charter school students received special
education services in FY 2016, whereas 17.4 percent of students in
sending districts received special education services. These
percentages are based off of DESE special education enrollment
reporting that unfortunately does not account for the intensity of
services received by individual students. Some special education
students spend the vast majority of their time in mainstream classrooms
with no additional support, whereas others are in self-contained
classrooms for most of the school week. This data does not account for
these differences.

It is possible that special education students with the greatest needs
are less likely to attend charter schools since larger districts have
greater economies of scale that better allow them to meet the unique
needs of particular populations of students (e.g. having enough
students with autism to provide a self-contained autism classroom
within the district). But without better data on the intensity of
services being provided to each student, it is very difficult to know
for certain the impact of these variations.

In-district special education spending is captured both through the
foundation budget rate and the above foundation rate. In order to
discourage districts from over-identifying students for special
education, the foundation budget uses an assumed full-time equivalent
rate of 3.75 percent of total enrollment. This is built upon an
assumption that 15 percent of all students receive special education
services 25 percent of the time (15% x 25% = 3.75%). The foundation
budget rate in the charter tuition formula uses this same assumed
percentage. Recent research has shown that the foundation
budget’s assumed in-district special education spending
levels are well below actual costs of providing necessary services, and
this is an issue that faces charter schools and regular districts. For
more detail, see Cutting Class: Underfunding the Foundation
Budget’s Core Education Program.

All additional in-district spending is captured through the above
foundation budget rate and by requiring sending districts to pay this
per pupil amount, the formula implicitly assumes that charter schools
are educating the same proportion of special education students. But
because charter schools have tended to educate a smaller share of
special education students, they end up receiving a disproportionate
share of a district’s special education funding. If charter
tuitions were adjusted to account for the lower share of in-district
special education students served by charters, the tuition rate would
go down in most cases.

How do charters affect a sending district’s foundation budget
and Chapter 70 aid?

Charter school students are associated with revenue directed to sending
districts (through local support and Chapter 70 aid) and their costs
(through charter tuition payments). A district’s foundation
budget counts together students attending district schools and those
attending charter schools. Factoring in a district’s total
foundation budget, the Chapter 70 formula generates a minimum local
spending requirement and Chapter 70 state aid at levels intended to
support the education of all of these students. Districts then fund
both the operation of their own schools and charter tuition payments
(and other out-of-district placements) out of this total budget.

What is the charter reimbursement formula?

In theory, when new students attend a charter school, district costs
shift from the direct cost of educating kids in district classrooms to
the cost of paying tuition to receiving charter schools. In practice,
however, districts often can’t recoup the full per pupil cost
of a departing student. Students going to charter schools are usually
sprinkled across classrooms and schools, so even if the total number of
exiting students is equal to the size of a full classroom or school, it
is often impractical to close them immediately. This can be especially
difficult for districts that lose smaller numbers of students to
charter schools, since these totals might not ever equal the size of
multiple classrooms or schools.

In order to address these transition challenges, the state funds a
charter reimbursement program that offsets a portion of district
tuition costs in the early years after the number of students attending
charters increases (these reimbursements are also referred to as
Chapter 46 Aid). Specifically, when tuition payments increase
for a given school district over the prior year, the state reimburses
that district for 100 percent of the increased cost in the first year
(when the formula is fully-funded). The state then reimburses 25
percent of this first year increase amount for each of the subsequent
five years. Reflecting this six-year reimbursements schedule, it is
sometimes referred to as the “100/25/25/25/25/25”
formula.

The reimbursement formula used to work on a three-year 100/60/40
schedule, but it was changed to the new six-year formula as part of
2010’s An Act Relative to the Achievement Gap. Year one of
the 100/25/25/25/25/25 formula was first implemented in FY 2011.

Here’s a stripped-down example of how the current formula
works: If a new charter school opens up and receives new students from
one sending district that generate $1 million per year in additional
tuition payments from the sending district (going from, say, $10
million in tuition payments to $11 million), reimbursements would work
as follows:

Reimbursements are based off of increases in
tuition payments, not on
total amounts. If a district sends a consistent number of students to
charter schools over several years and pays $10 million a year in
tuition year-in and year-out, it would not receive any reimbursement
funding after the sixth year. If a new charter school opened up,
however, leading tuitions to increase from $10 million to $11 million,
the sending district would then become eligible for reimbursements off
of the $1 million increase. (In practice, even if the number of
students stays constant, normal cost growth typically leads school
spending to increase, thereby triggering small charter tuition
increases that do initiate new rounds of reimbursement.)

An additional component of Chapter 46 aid is funding of first-year
tuition for new students attending a charter school who previously had
attended a private school or had been home-schooled. Since these
students hadn’t previously been educated by the sending
district, their charter tuitions represent a new cost for the district.
To help smooth this transition, the state fully pays this first-year
tuition. In later years, financial responsibility for these charter
students shifts back to the district.

What does it mean to say that reimbursements haven’t been
fully funded?

For many years, the state reimbursed districts for the full amount
determined by the charter reimbursement formula. But reimbursement
levels are subject to annual appropriations, and in recent years the
Legislature has not appropriated sufficient funding to provide sending
districts with 100 percent of the reimbursements as determined by the
formula. In fact, the relatively new 100/25/25/25/25/25 formula has
never been fully-funded. A year-by-year phase-in began in FY
2011—funding year one reimbursements at 100 percent in FY
2011, funding year one (100 percent) and year two (25 percent)
reimbursements in FY 2012, and so on). The first four years were all
close to fully-funded but, as shown in the graph below, the state has
only provided about two-thirds of the formula-driven reimbursement
amounts in the past two years.

These calculations above include full reimbursement of facilities aid
and full funding for first-year charter students who had previously
attended private schools or had been home-schooled. Setting these aside
in order to focus only on reimbursements associated with the foundation
base rate and the above foundation rate, these key portions of the
reimbursement formula are only 51 percent funded in FY 2016.

Fully funding reimbursements would have directed an additional $35.3
million to sending districts in FY 2015 and $47.1 million in FY 2016.

Corresponding with the large drop in funding of tuition reimbursements
in FY 2015, DESE changed its approach for prioritizing how available
funding is distributed. Rather than providing all sending districts a
uniform percentage of the total amount determined by the formula, DESE
is now prioritizing reimbursements to districts during the first year
of a tuition increase (the 100 percent reimbursement tier of the
100/25/25/25/25/25 sequence). Districts due reimbursements for later
tiers only receive funding as it’s available. For FY 2016 it
appears as though funding will be close to sufficient for funding
first-year reimbursements (DESE currently projects 95% reimbursement
for year one increases), with little to nothing left over for later
year reimbursements.

This effectively shifts the formula in FY 2016 from 100/25/25/25/25/25
to 95/0/0/0/0/0.

Who is responsible for transporting charter students and how is this
funded?

For students attending charter schools in the same district where they
live, the district is required to provide transportation under the same
rules established for district students. This can mean providing no
transportation for students living within a determined walk zone,
providing T-passes for the use of public transportation, or providing
transportation through a district’s existing school bus
network. One challenge some districts face is providing transportation
to charter schools that operate school schedules that vary
significantly from the schedule of district schools. In these cases,
districts lose economies of scale and often need to fund separate
transportation services for small numbers of students. Nonetheless,
once a charter school’s school day and calendar have been
approved by the Board of Elementary and Secondary Education, the
district is required to provide transportation that accommodates this
schedule.

Some charter schools choose to operate their own transportation
services for students who reside in the same district as where the
charter school is located. In these cases, they receive a per student
funding amount that is equal to the lesser of either the charter
school’s per pupil transportation costs or per pupil
transportation costs in the sending district. Since this transportation
amount is added to a sending district’s tuition calculation
(essentially a fourth rate on top of the three rates described earlier
in this brief), these costs can trigger charter reimbursement funding
from the state when they are part of an overall increase in tuition
costs.

Through his FY 2017 budget, the Governor proposes a few key
changes to
the charter reimbursement formula. Specifically:

For districts that are
low-performing and have charter tuition payments that exceed 9 percent
of Net School Spending, the six-year reimbursement schedule would be
shortened to a three-years, and reimbursements in year two would
increase from 25 percent to 50 percent; the schedule would shift from
100/25/25/25/25/25 to 100/50/25. Additionally, in order to receive
funding in the second and third years, these districts would have to
submit plans for using these funds.

All other districts would only
be eligible for 100 percent reimbursements in year one, thereby
eliminating 25 percent reimbursements in years two to six from the
current schedule.

The Governor proposes funding this revised system in FY 2017
at $20.5
million above current levels, which the administration projects would
allow for fully funding reimbursements for districts in years one and
two, and possibly for districts in year three.

The Senate working group’s proposal:

Last week (March 31, 2016), a working group appointed by the
Senate
President released a charter school bill, which among many other
proposals includes a few related to the funding mechanisms described
above. The House has not proposed similar legislation. Specifically,
the Senate working group bill would:

Move to the 100/50/25
reimbursement schedule but make reimbursements available to all
districts, not just those that are low-performing and have tuition
payments that exceed 9 percent of Net School Spending.

Provide districts with up to
$1,000 per student in “small district equity aid”
for each charter school student leaving a district with total
enrollment of 1,000 students or fewer.

Limit district responsibility
for funding charter school transportation under certain circumstances:
if a charter school and district cannot reach agreement on the charter
school’s start time, the district’s responsibility
for funding transportation would be limited to 50 percent of the
charter school’s transportation costs.